South Korea’s exporters may be in for challenging times, concludes a recent IMF Working Paper entitled “Should South Korea Worry about a Permanently Weak Yen?” The co-authored paper, which describes independent research in progress, argues that the relatively weak yen, the result of an aggressive Bank of Japan (BOJ) asset purchasing program, might give Japan’s biggest and best exporters a competitive edge over their South Korean competitors in the long run.
While an export boost for Japan will only manifest itself if certain conditions persist over a long period of time (e.g., the won stays strong), the consequences are worth considering.
The price competition-related prognosis was simple enough to be explained in a tweet from Firat Unlu. In essence, a relatively weak yen will affect Japanese and Korean exporters’ profit margins in the short term, in favor of Japan, eventually affecting export volume, again in favor of Japan. Such a scenario would see Japanese firms gain a competitive price edge over their Korean competitors and, as a consequence, enjoy a higher market share.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
If Japan’s exporters are able to gain a decisive competitive price edge, new “non-price decisions” will be made regarding labor outsourcing, the location of new production capacity, and investment in R&D. Such decisions, argue the authors, would “eventually drive underlying competitiveness of the two countries, going beyond the narrow bounds of simple price competition.” Such a process might, for instance, significantly alter the regional value-added chain.
Given the stiff competition South Korea currently faces from China in lower capital-intensive sectors, a shift in export competitiveness in favor of Japan is going to have notable and possible severe consequences for Korea. If such a shift resulted in a decrease in spending on R&D, the regional economic changes might be transformative.
South Korea currently spends the highest percent of its total GDP on R&D (4.04 percent); this is, in theory, because of the demand to stay competitive against Chinese and Japanese exporters. With the yen rapidly depreciating against the won over the last few years, Korea is bound to lose some of its competitive edge. The persistence of this trend would be a boon to Japan’s flagship exporters.
Whether the weak yen actually boosts Japanese exports in a way envisioned in the report is yet to be seen. There are more than a few people who think the BOJ’s asset purchasing program is unsustainable (at 57 percent, BOJ’s assets as percentage of GDP is more than double that of both the U.S. and Eurozone). There is also no guarantee that the won remains strong vis-à-vis the yen.
What seems certain, however, is that Korea’s lawmakers will need to do something (besides quantitative easing) about Korea’s increasingly bleak growth prospects. What that is exactly and whether there exists the political will to do it are both open questions.